Downtrend in pharma stocks may remain over next one month

Weakness in the shares of several pharmaceutical companies are likely to persist over the next one-and-a-half month, thanks to appreciating rupee and shift in investors preference from defensive to cyclical stocks amid hopes that economic revival may gain traction with the new government at the centre.

However, despite an appreciating rupee, pharma sector is optimistic that exports growth will be in double digit this year compared to the 2% growth witnessed during the last fiscal.

Siddhant Khandekar, pharma analyst, ICICI Direct, said, "In the short to medium term, there will be some impact on exports due to appreciating rupee. There will be some pricking, therefore there could be some tweak in the future estimates. However, if rupee appreciates beyond this level, the Reserve Bank may intervene since it will impact exports."

The appreciating rupee and a likely stability in the economy has also seen a shift from defensive stocks to cyclical ones. Khandekar said profit booking is expected in export-oriented stocks.

Ashutosh Gupta, chairman, Pharmaceuticals Export Promotion Council, said, "Compared to the growth reported in previous years, last year the growth was much less. This year we are expecting a double-digit growth, at least 10% which we are targeting at this point. We are in constant discussion with the commerce ministry on how to achieve this growth target." Pharma exports grew by less than 2% in the 2013-14 over the previous fiscal year.

Since May 9, 2014, the healthcare index has dropped 5.64%. With signs of stability expected in the economy post poll verdict, investors have been increasing exposure to cyclical stocks such as infra, cements, automobile and banking from the defensive sectors such as FMCG, IT and pharma.

Analysts expect another 2-5% drop in most of the pharma stocks going ahead, while in few others the impact could be around 5-12% over the next one-and-a-half month or till the market stabilises.

Khandekar said, "Most pharma stocks have started seeing some corrections. Besides this, the dollar benefit will only be available till the first quarter of the present fiscal. So on a constant currency term, pharma exports may grow by 15%."

While an appreciating rupee may see some pressure on pharma exports in the short-to-medium term, the loss in exports revenue could be offset in the long term following benefit of fall in raw material prices.

"Appreciating rupee will bring down the prices of raw materials. Also, most pharma companies have overseas subsidiaries. A strong rupee will bring down that expenses if you convert it from dollar to rupee.

Besides, companies can also increase the price of the products to safeguard their margins which took a beating for a while now. So while exports may suffer for the time being, other factors will offset the loss," said Ranjit Kapadia, senior VP-pharma, Centrum Broking.